What Will Drive Southwest’s Growth In The Near Term?

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Southwest Airlines

Southwest Airlines (NYSE:LUV) has had a very mixed year so far. While financials tended to remain positive in the first quarter, the overall business took quite a hit following the accident on April 17, in which a woman lost her life. Bookings have remained rather soft since. That said, management is certain that they’ll be able to recover from the rather unfortunate incident through the second half of the year. In this respect, the company decided to raise its guidance. We have created an interactive dashboard What Is The Outlook For LUV on the company’s expected performance in 2019. You can adjust the revenue and margin drivers to see the impact on the company’s overall revenues and earnings.

As mentioned above, April marked the month in which Southwest recorded its first accident-related fatality. Naturally, the airline witnessed bookings in the quarter shrink post the incident. In fact, the company estimates that nearly $100 million in passenger revenues were lost as bookings took a hit, representing a near 3% decline in revenue per passenger seat mile (RASM), an important key metric.

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That said, we expect this metric to improve through the remainder of the year, much to shareholders’ relief, with the impact being all but negligible in the next year. In this respect, the company has employed a number of revenue management tools and techniques to help boost revenues by as early as Q3. Further, the airline hopes to generate incremental improvements in pre-tax results of $200 million in the year as the investment in the new reservation system begins to pay off.

All in all, Southwest is positive that the remainder of the year will show improved results. For starters, RASM is expected to improve sequentially in the third quarter, with the key metric coming in almost flat. Further, the company believes that the figure has the potential to finally return to positive growth in Q4, continuing a positive run through 2019 as well.

On the cost side, the airline now expects its non-fuel costs, which they have been maintaining quite well thus far, to rise by about 2-3% in Q3 and by about 0-1% for the full year, with the figure coming in flat in 2019. In terms of fuel costs, the company expects to pay about $2.25 per gallon in Q3, up from $2.07 a year ago, representing a much smaller headwind than what other airlines are facing, primarily because it incurred massive fuel hedging losses last year. We expect fuel costs to play a more minor role in increasing expenses going forward.

Overall, it seems like the company should be in a much better financial position in 2019. While revenues did take a hit, we expect a resurgent economy, and the consequent strong demand trends to push the top line in the next financial year. Further, the company hopes that its expansion plans and the A320 MAX will help improve efficiency, and thereby positively affect margins in the coming year.

 

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